Ⅰ. Introduction
A joint stock company is a type of partnership based on capital, where decision-making processes are generally governed by the majority rule. Shareholders who hold the majority of the capital enjoy a significant advantage in shaping the decisions of the general assembly and the composition of the board of directors. This often creates obstacles for minority shareholders in participating in the management of the company. To address this imbalance and to ensure a fairer basis for internal representation, one of the key regulations introduced by the Turkish Commercial Code No. 6102 ("TCC") is Article 360.
ⅠⅠ. Legal Nature of the Right to be Represented on the Board of Directors
Article 360 of the TCC provides that the right to be represented on the board of directors may be granted, via a provision in the articles of association, to three distinct groups: (i) specific share groups, (ii) shareholders who form a group by certain characteristics, and (iii) minority shareholders.
According to Article 360/2 of the TCC, the right to representation is explicitly considered as a "privilege." This means such a right may only be granted through the articles of association, and its removal is subject to special quorums. Pursuant to Article 421/3-b of the TCC, removing such privileges is only possible with the approval of shareholders representing at least seventy-five percent of the capital. Furthermore, in accordance with Article 454 of the TCC, if privileges are granted under Article 360 via the articles of association, the enforcement of general assembly resolutions violating such privileges requires the approval of a special committee composed of the privileged shareholders, thereby ensuring the protection of these rights.
III. Groups Eligable to Representation
1. Specific Share Groups
The first group mentioned under Article 360 of the TCC is specific share groups. In legal doctrine, this is referred to as a "group privilege" and is particularly supported by judicial practice under the former TCC. For instance, in a company with A and B group shares, the articles of association may provide that the board members be selected exclusively from among A group shareholders or from nominees proposed by A and B group shareholders in certain proportions. There is no requirement concerning the shareholding ratio for forming such share groups; it is sufficient to comply with the quorum requirement set out in Article 421/3-b of the TCC.
2. Shareholders Forming a Group by Certain Characteristics
This category may include shareholders who share a common trait, such as carrying a specific surname, being employees of the company, practicing the same profession, or being members of a family. What is important here is that the right is granted not to a specific individual, but to a group defined by an objective and clear common feature. The definition of such a group must be precise, understandable, and not open to interpretation. Otherwise, provisions targeting specific persons may be considered invalid and should not be included in the articles of association.
3. Minority Shareholders
Article 360 of the TCC also allows for the right of representation to be granted to minority shareholders. Although Article 411 of the TCC defines minority shareholders as those holding at least 10% of the capital in non-public companies (and 5% in public companies), the term "minority" under Article 360 is interpreted more broadly in doctrine. It may include shareholders who, although not meeting the statutory thresholds, are in a disadvantaged position against a majority holding more than 50% of the voting rights.
Accordingly, the concept of minority should be clearly defined in the articles of association. The legislative rationale states that both the minority and the specific groups of shareholders must be identifiable and distinguishable from other shareholders for the provision to be applicable. Merely stating a percentage without clarifying who is included in that percentage or who may nominate a candidate can cause confusion regarding how the representation right should be exercised. If the definition is not clearly set out, for example, a shareholder holding 40% of voting rights may still be deemed a minority and benefit from the rights under Article 360.
Ⅳ. Methods of Exercising the Right of Representation
In practice, representation rights in the articles of association can be structured in two ways: (i) the right to elect board members from within a specific group, or (ii) the right of that group to nominate board candidates. Both methods require the general assembly to respect this right and elect the appropriate nominee. As will be further discussed under Section V below, the rejection of such a nominee is only permissible if there is a "just cause." Otherwise, the resolution of the general assembly may be subject to nullity.
Board members elected by or nominated from such groups are, during their term, subject to the same duties as any other board member, primarily acting in the best interest of the company. They may not act solely in favor of the group they represent, as Article 369 of the TCC imposes the duties of care and loyalty on all board members. This framework prevents abuse of representation rights.
Ⅴ. Practical Significance and Risks
As noted above, representation rights may be granted in two forms: (i) the right to nominate candidates for the board of directors, or (ii) the right to elect board members directly from within the group.
However, it should be emphasized that nominating a candidate does not guarantee their appointment to the board. A nominee must still be elected by the votes of other shareholders. That said, Article 360 of the TCC stipulates that the general assembly may only reject the nominee if there is a just cause.
If the general assembly rejects a nominee without a valid reason, it would constitute a violation of the representation right stipulated in the articles of association. While the court may not directly appoint the nominee, the most appropriate legal remedy would be an annulment action against the general assembly resolution. Nevertheless, such annulment does not guarantee appointment; it merely invalidates the general assembly's decision.
In Turkish legal doctrine, this situation may be interpreted as
a deficiency in the company's corporate bodies. A
failure by the general assembly to comply with its obligations
under the articles of association may render the company's
decision-making body dysfunctional. Accordingly, under Article 530
of the TCC, the relevant group of shareholders may file a petition
the court to appoint a trustee.
Should the general assembly persist in failing to appoint a board
member without just cause, a prolonged deficiency in corporate
organs could lead to legal proceedings for the dissolution of the
company. Thus, if the right to nominate candidates is
systematically obstructed by the majority, it could harm the
company's corporate structure and undermine the legal security
of shareholders.
In this respect, if there is a structural resistance preventing the
appointment of group nominees, the privilege may become ineffective
in practice and could cause the company's governing bodies to
become unlawfully dysfunctional. Therefore, these risks must be
considered both when drafting the articles of association and in
the company's decision-making processes.
ⅤⅠ. CONCLUSION
Article 360 of the TCC serves as a vital tool to correct the imbalance caused by majority rule in joint stock companies. Allowing shareholder groups to be represented in the management enhances transparency and supports corporate democracy. However, if these rights are not exercised consciously, fairly, and in compliance with the law, they may result in significant governance issues. It is, therefore, evident that representation privileges must be meticulously structured and drafted with clarity to prevent ambiguities and ensure enforceability.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
